The bulls just didn’t have enough gas in the tank to make it three weeks in a row. The lack of gain, however, isn’t even the alarming part….. stocks only lost ground to a tiny degree. The red flag is the shape of the chart and the way things progressed over the last five days.
We’ll look at that idea in detail below. First up though, a quick review of the major economic numbers.
Last week was minimal in terms of economic data flow, and only a small amount of the small amount we got actually meant anything. What’s that? Unemployment claims – both new and continuing – sank a tad (not enough), while consumer credit levels soared well beyond expectations (up $7.6 billion versus the forecasted $2.0 billion increase).
The coming week will be more turbulent; here are the biggies to watch for, in that they actually impact the market.
* Wednesday: Retail sales, with or without autos, are expected to rise again, continuing a long streak of improvements here.
* Thursday: Claims data (as always). Once again, the expectation is basically flat. We’re also going to hear about producer inflation then, which has been creeping higher (though not yet problematic).
* Friday: A big day, kicking off with consumer inflation rates; they too are creeping higher; though have yet to reach problematic levels. Industrial production and capacity utilization for March will also be unveiled, and both are expected to be slightly higher. Though higher numbers from factories don’t stave off a short-term correction, they do point to a longer-term bull trend that true ‘buy and hold’ folk want to stay in.
S&P 500 Index
Though Friday’s volume behind the selloff wasn’t exactly heavy, it wasn’t exactly light either – it was heavy enough to worry about the fact that we sold off. The red flag, however, is the complete loss of bullish momentum and the early unfolding of bearish momentum. We kicked off the week making higher highs and higher lows (albeit tepidly), and ended the week making lower highs and lower lows. That said….
How much of this weakness can be blamed on the impending government shutdown (at the time)? Great question – it’s hard to say. Could or should the market really care?
Either way, the avoidance of the shutdown opens up the possibility that we could see excited investors plow back into stocks on Monday ONLY because the government didn’t come to a screeching halt. It’s a knee-jerk response though, and may not last that long.
How to do this dance: The S&P 500 (SPX) (SPY) is trapped between its upper 50-day Bollinger band at 1350.7, and its 20-day and 50-day moving averages around 1316. With only a 2.5% range to bounce around in, we can afford to take a “wait and see” approach and not miss anything trade-worthy. A move under 1314 or so will be the early signal of a bearish move, while a persistent (and successful) attack on the ceiling at 1350.7 will fully suggest the bulls are back at it. In the meantime, any assumption is just a guess.
Of course, given the shape of things now, our short-term ‘guess’ is still a bearish one.
It’s not been much of a focal point of late, mostly because it’s been stuck in no-man’s land. But, the CBOE Volatility Index (VIX) (VXX) (VXZ) made a pretty good hint on Friday that it’s trying to make upward progress again. If it can cross above its 20-day and 50-day moving averages in the same sense the S&P 500 slides under its same moving averages, that will only go to confirm a market pullback.
And just to help keep the bigger picture in mind, here’s a renewed look at the weekly chart.
We alluded to it above, but it’s verified on the graph below… the bullish volume has been waning, and this past week, the bearish volume started to swell. Though only marginally, last week’s loss was accompanied by higher volume after two weeks of tepid volume gains. Take a look at the volume bars to see it for yourself.
It’s also clear on the weekly chart that this last week was a bit of a bigger-picture transitional one. The highs didn’t really get any higher, while the VIX’s lows didn’t get any lower. Both reversed their previous directions as well.
Once again, some of that may have stemmed from a looming government shutdown that didn’t end up happening. But, how much did that matter? Was it the only reason stocks stopped rallying? Not likely, which means that – by virtue of still being overbought on the weekly chart – the odds favor more downside sooner or later.
S&P Sector Performance
While the broad market lost a little ground last week, not every sector felt that demise. Healthcare (XLV) held up pretty well, as did energy (XLE)…. again. Though last week’s relative strength is never a guarantee of future performance, there’s still an underlying reason for last week’s strength that may still be intact. (Our job as traders is just to figure out what it is.) As for all the other sectors, none look particularly healthy after last week’s struggle.
S&P Sector Performance, since November 30th
As for what’s driving energy, we can break the sector performance down into its individual industries and see what’s emerging – or not emerging – as the next leader. As it turns out, explorers and drillers are turning up the most heat…. especially drillers, though explorers seem to have more upside room on front of them. Refiners, on the flipside, appear to be paying the price for excessive gains over the last few months. Storage, transportation, equipment, and services all seem to be stuck in or near neutral.
As for the healthcare sector, the race that facilities and equipment stocks were winning now looks like the pharmaceuticals group is trying to take over….. and they have the most ground to recover (in a good way). Biotech also looks like it could be undervalued here, but it’s the pharma group that looks best-poised to dish out a nice bullish run now.